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WIKI ANALYSIS
The Goodyear Tire and Rubber Company (NYSE:GT) is a vertically integrated developer, manufacturer and distributor of tires with 96 manufacturing facilities in 28 countries. During FY2008, Goodyear posted net sales of $19,488 million.
In addition to the tire business, Goodyear used to operate an engineered products division. This division manufactured power transmission belts, hoses, and other rubber products. It sold this segment to private equity firm Carlyle Group in August of 2007 for $1.5 billion in cash.[1]
In 2007, Goodyear settled a series of strikes in 2006 that resulted in an estimated loss of $361 million in income. An agreement was reached with the United Steelworkers Union (USW) that is expected to save close to $1 billion through 2009. Other cost saving initiatives have been implemented; Goodyear has eliminated 4,000 jobs since the beginning of 2008 and intends to eliminate 9,000 more jobs by the end of 2009.[2] Lower costs, achieved through workforce reduction and a global salary freeze, will aid Goodyear in paying off its $4.7 billion in long term debt and capital lease obligations; even so, the company will remain vulnerable to fluctuating interest rates.[3]
On September 18, 2009, Goodyear signed a four-year master labor contract pertaining to Goodyear's tire production in seven North American plants that was ratified by members of the United Steelworkers Union (USW). The new contract builds on changes made after the post-2006 strikes agreements. The 2009 contract attempts to increased productivity in how Goodyear's plants are run, lower Goodyear's overall cost structure in regards to its wage and benefit savings, and increase flexibility so Goodyear can respond to changes in market conditions.[4] The new contract are expected to provide Goodyear with cost savings of approximately $215 million over the term of the four-year contract.[4]
Goodyear has shifted its focus to pricing from volume in the past few years. This was very noticeable in the 2008 numbers. Despite the fact that tire sales volume fell 12.5% in the the U.S. and 5.8% abroad, revenue only fell by 0.7%.[3] Pricing increases are being passed to the consumer in favor of increasing sales volume. This strategy is working both domestically and internationally because of weak dollar's effect on imports. The dollar rose 4.8% in value relative to the euro during 2008 but remained weak at the end of 2008, trading at $1.40 per euro.[5]
Company Overview
Q3 FY2009 Summary
Goodyear recorded its first profit for the first time in nine months for the third reporting quarter of FY2009; earnings more than doubled to $72 million this quarter compared to third quarter FY2008.[6] Goodyear's third quarter FY2009 sales were $4.4 billion, down 15% from FY2008 third quarter sales, but an 11% increase compared to FY2009 second quarter.[7] Goodyear associates these increases from reducing expenses by cutting output, shifting production to lower-cost plants (lower raw material costs of $105 million), and eliminating about 5,800 jobs this fiscal year, which include 300 jobs this quarter.[8] Furthermore, Goodyear launched 15 new product this quarter, which has partially contributed to its increased earnings.[9]
Despite improved third quarter earnings, GT's stock price dropped over 20% after Goodyear forecast an operating loss of $75 million to $125 million in North American in the fourth quarter.[10] The cause of the concern is that GT's North American business is the company's largest region by revenue.
Business Segments
Original Equipment Tires (27.3% of FY2008 Total Tire Sales)
OE Tires are new tires bought by manufactures to fit the specific needs of its vehicles. Within this category, Goodyear produces produces tires for passenger cars, light trucks, trucks and specialty vehicles. OE tire sales decreased by 15.7% in FY2008 compared to FY2007. The decrease in OE tire sales were mostly affected by operations in North American Tire (U.S. and Canada), where OE tire sales decreased by 22.9% compared to FY2008.[11] The decrease was led by recessionary economic conditions resulting in lower demand for new vehicles.
Replacement Tires (72.7% of FY2008 Total Tire Sales)
Replacement Tires consist of tires bought by consumers to replace the tires on their vehicles. Replacement tire sales decreased by 5.5% in FY2008 compared to FY2007.[11] Replacement Tire sales decreases were also led by recessionary economic conditions, but were less impacted due to less impact from the new vehicle industry.
Key Trends and Forces
Raw Material Costs
Together oil derivatives, in particular naptha, and natural rubber, account for about 88% (60% oil derivatives and 28% rubber) of a tire's raw material composition. Oil Prices have tripled and rubber prices have quadrupled in the past 3 ½ years. Raw material costs rose 17% to about $829 million or to 5% of the cost of the goods sold by Goodyear in 2006. Natural rubber prices have been driven up by an increasing demand from China and poor weather conditions. Continued demand from China and a slow recovery of the rubber industry could keep rubber prices elevated and put pressure on Goodyear's profits.
Gas Prices
Higher oil prices also mean higher gas prices. Higher gas prices decreased demand for SUV's and light trucks in 2006. This caused a decrease in Goodyear's original equipment (OE) tire sales. Higher gas and utility costs also slowed tire industry growth by decreasing income power for the low and middle income families. If oil prices decrease, then Goodyear could see greater profits and better industry growth.
The Weak Dollar Drives Profits
A CRT Capital Group analyst has called Goodyear "...poster child for people that benefit from a weak dollar."[12] This is true for two main reasons: decreased imports and improved currency effect on foreign sales. A weak dollar will greatly discourage imports from abroad. The pricing advantage of foreign firms that comes from cheap labor has been offset recently by the increase in their exchange rates and increase in dry bulk shipping rates. Since 60% of Goodyear's 2007 sales came from outside of the United States, a weaker dollar benefits their bottom line in absolute terms. This 60% of their incoming cash flow will increase in nominal terms because of the foreign currency appreciation.
Labor
In 2006, strikes occurred at 16 North American facilities. The strikes resulted in an estimated income loss of about $361 million (operating income in 2006 = $768 million). Goodyear was able to come to an agreement with the United Steelworkers Union (USW) that covers 12,200 workers at 12 US plants. This new plan is expected to provide about $610 million in cost reductions by 2009 and up to $300 million in annual savings thereafter. This is expected to occur by increasing productivity and efficiency, decreasing capacity, and lowering legacy costs. At the same time, Goodyear will spend about $550 million on updating North American plants and contribute about $1 billion to its new independent employee benefits entity. Goodyear has a total of 145,000 employees and is still susceptible to future labor strikes and slowdowns.
Interest Rates
Goodyear's $6.5 billion debt makes the company vulnerable to changing interest rates. Interest payments totaled $2.4 billion in 2006. The labor strikes caused cash flow to decrease 37% to $560 million, about 8% of total debt. Goodyear has had to restate earnings multiple times in the past due to unprepared financial statements and has one of the lowest credit ratings in its industry. This lack of financial stability and risk of higher interest rates, due to bad credit, may make paying off this debt very difficult.
Regional Growth
The North American Tire segment makes up about 53% of sales for Goodyear. Replacement tire sales decreased 13.4% and OE tire sales decreased 4.8% in 2006. The operating margin for the North American Tire segment was -2.6%; in comparison, the Latin American segment had a 20.3% operating margin. Goodyear depends on the North American segment to generate a substantial amount of the company's cash flow. A strong economy and the success of its turnaround strategy, involving the cost saving initiatives and the new labor agreement, are vital to Goodyear.
Latin America and Asia make up 8% and 7% of Goodyear’s tire sales respectively. In China, there are only 12 passenger cars per 1000 inhabitants, whereas in Western Europe there are over 500 passenger cars per 1000 inhabitants. In 2006, operating income growth was 11% and 24% in Latin America and Asia, respectively. Sales growth in Latin America was 9%. The Latin American Tire segment is largely dependent on Brazil which accounts for 46% of its sales. Both Asia and Latin America have high growth potential, and their future development could make a big impact on Goodyear’s revenues.
Competition
Goodyear's top competitors are Michelin and Bridgestone. Goodyear is the third largest by market share behind Bridgestone and the leader Michelin. Both competitors are based overseas, Michelin in France and Bridgestone in Japan. Michelin is the leading producer in Europe and also is the leading producer in China. Bridgestone is the leading producer in Japan. Michellin, has a less favorable cost base than Goodyear but can charge higher prices due its superior technology. Through Bridgestone's combination of marketing and product mix it has been able to increase its sales dramatically in comparison to its competitors while charging higher prices.
| Company | Revenue (in millions) | Revenue Growth | Largest Sales Region | Operating Margin | Research and Development Cost (in millions) |
|---|---|---|---|---|---|
| Goodyear | $20,258 | 2.7% | North America | 3.9% | $359 |
| Michelin | $22,031 | 5.1% | Europe | 8.2% | $591 |
| Bridgestone | $25,113 | 11.1% | North America | 6.4% | $728 |
link matrix sample report 2007==References==
- ↑ http://goliath.ecnext.com/coms2/gi_0199-6831273/Goodyear-wraps-sale-to-Carlyle.html
- ↑ Goodyear Tire & Rubber 2008 Annual Report
- ↑ 3.0 3.1
- ↑ 4.0 4.1 Goodyear's Innovative USW Contract Improves Efficiency, Cuts Costs
- ↑ New York Federal Reserve
- ↑ Goodyear's Third-Quarter Earnings Double
- ↑ Goodyear Reports Improved Third Quarter Earnings; Company Sees Opportunities as Markets Recover
- ↑ [Goodyear Falls Most Since 1987 After Regional Outlook (Update1)]
- ↑ Goodyear 3Q profit surges, shares sink on
- ↑ The Goodyear Tire & Rubber Company Reports Operating Results (10-Q)
- ↑ 11.0 11.1 11.2 Goodyear FY2008 Annual Report, Pg 11
- ↑ http://www.bloomberg.com/apps/news?pid=20601103&sid=az4RrjXAfXCQ&refer=us
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